04) Lending products

Question 1

How often should you review facilities?

Answer 1

at least annually

Question 2

Why are overdrafts useful

Answer 2

not all businesses paid in advance for their services, adds flexibility for recieveables
only pay interest on what you use as well

Question 3

what is hardcore debt

Answer 3

when the overdraft is in use at the end of every month and there is not sufficient credit turnover to clear this during the month.

Question 4

What should the RM consider before granting the overdraft?

Answer 4

why the overdraft is needed
duration that the facility will be needed
ability to honour the agreement -look at cash flow and forecasts
ability to service the debt (interest)

Question 5

Name 3 key features of an overdraft?

Answer 5

Usually the simplest, cheapest and most flexible form of lending.

• interest charged on actual amount drawn
• overdraft facilities repayable on demand
• usually have an overdraft arrangement fee
• reviewed periodically
• depending on size, may require security
• impacted by the lending code-must be provided alongside clear and fair information

Question 6

Name Two forms of sales/receivables financing

Answer 6

Factoring and invoice discounting

Question 7

Factoring - what is it?

Answer 7

involves a business selling its invoices. used to reduce admin costs. factoring company processes the invoices and can provide ledger management services. Factoring company will advance up to 85% of approved invoices.

Question 8

Difference between recourse and non-recourse factoring?

Answer 8

non-recourse factoring the factoring compnay assumes teh bad debt risk, obviously more expensive.

Question 9

Invoice discounting? what is it and how is it different to factoring?

Answer 9

Another way of providing funds against sales ledger, but the company retains full control of the sales ledger admin wise. Invoice discounter will review business, records, systems and credit score will then agree to advance a %.

Question 10

What is the difference between a credit and a charge card?

Answer 10

charge cards agreed payment date, credit cards no date it is a revolving credit facility. both are subject to the lending code

Question 11

Name two ways a business can obtain equipment and resources?

Answer 11

outright purchase

hire purchase or lease arrangements

Question 12

Detail key facts about Hire purchase:

Answer 12

Hire purchase: allows the cost to be paid over a fixed period of time, when all payments are made the business then owns the asset. can however claim tax allowances back from beginning of the contract

Question 13

Leasing can take 3 forms: detail them and the differences between them

Answer 13

Leasing means the business never owns the asset outright, some arrangements allow the customer to buy at the end of the contract. lessor is the company, lessee is the customer

01) Finance leasing-long term lease, business responsible for maintaining the asset
02) operating lease - not needed for entire working life of an asset, repsonsible for maintanance and insurance, lessor retains ownership so not featured on SOFP.
03) contract hire used for company vehicles.

No asset finance is subject to the lending code

Question 14

What is franchising and why would a business do it?

Answer 14

Franchising is where a successful business lets another use its name and idea, usually for a fee, royalties of percentage of profits

Question 15

Describe four Intl trade finance instruments?

Answer 15

1) Bills of exchange - legal instrument that evidences an importer promising to pay an export a specific amount by a specific date. cheque is an example of this

Documentary credits - usually work in tandem with bills of exchange, they detail documents and conditions required for importer to take control of exporters goods

Documentary collections - when the banks work together to collect payment. shipping documents sent to bank who then authorise payments. Bank may forward this payment or avalised

Bills of Lading - used for goods transferred by ships, documents issued to show they are in transit, if clean then not damaged.

Question 16

Four methods of payment for intl trade finance?

Answer 16

01) payment in advance
02) documentary letters of credit
03) documentary collections
04) open account trade

Question 17

best method of payment for the exporter?

Answer 17

payment in advance - pays for goods up front so no risk to the exporter, not ideal for new relationships or moving into new markets. used when concerns over customers ability to pay. may put exporter at competetive disadvantage (do they have monopoly) as importers want to delay paying

Question 18

outline the key features of documentary letters of credit?

Answer 18

is done via the bank system where customer and banks interact. good for exporters and payment will be made on time if documentation is accurate. can forward payment, only credit risk when importing bank grants facility to importer. secure for export customers.

Question 19

best trade payment method for a long lasting relationship?

Answer 19

Open account trade, similar to offering credit to a UK customer-highest risk of non payment , majority of UK intl trade runs on this method.

Question 20

Can a bank assist with financing trade?

Answer 20

Yes numerous methods of doing this

Question 21

Outline the key features of EFG?

Answer 21

• 3 months to 10 years

- part of a BIS scheme